China’s 2019 Negative Lists – a Positive, if Small, Step

For international investors looking at opportunities in China, this summer has been largely a waiting game.   Investors have been waiting and hoping as the Chinese government and the Trump administration continue their discussions aimed at resolving the current trade dispute, and watching for guidance on specifics of implementation of China’s new Foreign Investment Law, which was promulgated on March 15, 2019 and will come into effect on January 1, 2020. 

As we continue to wait, one of few concrete developments in China’s regulation of foreign investment was the issuance of an updated set of Negative Lists -- namely, the Special Administrative Measures on Access to Foreign Investment (2019 edition) (the “National List”) and the Free Trade Zone Special Administrative Measures on Access to Foreign Investment (2019 edition) (the “FTZ List”) -- and an accompanying new Catalogue of Encouraged Industries for Foreign Investment (the “Catalogue”).  All of these documents were jointly issued June 30, 2019 by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) and came into effect on July 30, 2019. 

HOW THE LISTS WORK

The two Negative Lists stipulate the industry sectors in which foreign investment is either prohibited or restricted.  Foreign investment in restricted sectors is subject to foreign investment regulatory approval.  Industry sectors that are not listed are open for foreign investment, and do not require foreign investment regulatory approval.  The FTZ List and the National List respectively cover foreign investments in China’s various free trade zones (“FTZs”) and in the rest of China.  Frequently, industry sectors are first opened for foreign investment within the FTZ as a trial, before they are opened nationwide. 

Foreign investors need to be aware that particular sectors not listed in a Negative List may nonetheless be subject to restrictions due either to other industrial policies or the requirement to obtain a particular industry license that may be difficult to obtain.  Homework is therefore required.

The Catalogue specifies industry sectors where foreign investment is encouraged and eligible for tax and other investment incentives and includes two sub-catalogues, one applicable nationally and the other in the 22 provinces designated as China’s “central and western region”.

WHY THE NEW EDITIONS MATTER

The new editions of the National List, the FTZ List and the Catalogue do not represent a dramatic change in Chinese foreign investment policy and more far-reaching changes likely await progress in the China-U.S. trade talks.  At the same time, the National List and the FTZ List are materially shorter, with fewer industry sectors still prohibited from or restricted for foreign investors.   The National List now includes 40 items, down from 48.  The FTZ List includes 37 items, down from 45.  Conversely the Catalogue has grown, adding 67 new sectors where foreign investment is eligible for incentives. 

Key changes in the National List and the FTZ List include as follows:

  • The service sector has been a particular focus.  For example, the 51% equity cap on foreign investment in domestic shipping business has been removed.  Restrictions on foreign control of municipal gas and water supply and of cinemas and performance agencies have been removed as well. 
  • Of particular note, a number of foreign ownership restrictions in the telecommunications sector have been dropped, including in regard to e-commerce, domestic multi-party communication services, storage and forward services, and call centre services.  This is a welcome development for many international tech companies, although it is not unexpected, with foreign investment restrictions in these areas previously having been lifted in the FTZs.  Foreign investment restrictions in other key areas, including internet data centres, continue.
  • The mining sector has been further opened, with the exploration and mining of molybdenum, tin, antimony and fluorite no longer prohibited for foreign investment. 
  • As a result of the revisions to the FTZ List, foreign investment in fisheries is no longer prohibited within the FTZs and foreign investment in the printing of publications in the FTZs is no longer restricted to a minority foreign stake. 

A major focus of revisions to the Catalogue is to enhance support for the high-tech manufacturing sector.  In the IT sector, foreign investment in, for example, 5G components, equipment for cloud computing and IC etching equipment are all newly listed.  Service sectors newly covered include engineering and accounting services, e-commerce, AI and clean manufacturing. 

LOOKING AHEAD

The new round of investment liberalizations implemented via the new Negative Lists and Catalogue is welcome news for international companies in a number of sectors.  Equally, the range and extent of liberalizations cannot be described as dramatic or far-reaching and are not likely to significantly impact the level of new foreign investment coming to China. 

More dramatic changes to the foreign investment environment in China may be coming.  Further revisions to the Negative Lists and Catalogue might come as part of a China-U.S. trade deal.  The Chinese government recently announced a significant expansion of the Shanghai FTZ through establishment of a new Lingang area.  Information about the specific investment policies to be implemented in Lingang remain scant but some commentators expect that Lingang will be used to trial innovative tax and other policies.  The government has also announced wide-ranging pilot reforms in Shenzhen, which seem likely to significantly change the policy environment for foreign investors there.  Critically, the Foreign Investment Law takes effect from January 1 next year and, whichever direction the trade and investment winds blow, various implementing regulations are expected shortly in order to animate the principles set forth in that law.  These various changes in the ecosystem for foreign investment in China will almost certainly eclipse the modest revisions to the Negative Lists. 

Managing Partner, Morrison & Foerster (Beijing)

Paul McKenzie is Managing Partner of the firm's Beijing office. His practice focuses on a broad range of corporate transactions and regulatory compliance matters in China. 

Mr. McKenzie advises international and Chinese corporations on a diverse range of matters, including acquisitions and divestitures, real estate development projects, resource development projects, strategies for licensing and distribution of software products, privacy law compliance, structures for sale and distribution activities in China, and regulatory compliance strategies.

Mr. McKenzie has practiced in Hong Kong and Beijing since 1993. Prior to joining Morrison & Foerster in 2005, Mr. McKenzie was the managing partner of another major U.S. law firm’s Hong Kong office.

Mr. McKenzie is ranked as a leading lawyer in China for Projects and Energy in 2014 – 2018 by Legal 500 Asia Pacific. He is also recommended for Corporate/ M&A in 2011-2018, Real Estate in 2011-2015, Private Equity/Venture Capital in 2016, and TMT in 2017 – 2018. He is also recommended for M&A by IFLR1000 in 2013, 2014 and 2016. Mr. McKenzie is designated as a leading individual for Energy & Natural Resources by Chambers Asia Pacific 2015 and a Leading Lawyer, Mergers & Acquisitions – China by Asialaw Leading Lawyers 2006-2009. He is also recommended for China matters by The International Who's Who of Mining Lawyers 2006-2013 and The International Who's Who of Real Estate Lawyers 2009-2013.

Mr. McKenzie received his LL.B. from the University of Toronto in 1989. He is admitted to practice in Hong Kong (1998) and British Columbia, Canada (1990). He is fluent in English and Chinese.